The UAE wants a dollar lifeline

But on today's show, we'll explain just how currency swap lines work and why the UAE and maybe some other countries might need them. That's all coming up after the break.

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Learn more at Humana.com slash employer. This message comes from Bombus. Comfy footwear is the last thing you want to worry about this summer. Bombas sandals and slides are perfect for beach days, barbecues, and everything in between. Go to bombus.com slash NPR. A currency swap is, well, it's just what it sounds like. One country or a country's central bank swaps a chunk of its currency for another currency. So in this case, if President Trump approves this swap line to the United Arab Emirates,

the U.S. would swap a certain amount of dollars for UAE Durham's for a certain period of time, but probably not right away. Rachel Zemba is an economic risk specialist and a senior fellow at the Center for a New American Security. So typically a swap line works that there is an option to draw on the liquidity rather than one needs to. Liquidity, the ability to turn on the dollar tap and make that money flow. The U.S. has extended that privilege via currency swap lines many times in the past, including, of course, to Argentina last year. It extended lines to 14 countries during the 2008 financial crisis. But not all of them needed to use the U.S. dollar faucet.

Just having the option was enough. In a sense, the symbolic nature and additional liquidity provided by knowing that it existed, provided some solace to, thanks to other institutions that there would not be shortages of foreign currency liquidity. Currency swap lines are like backstops, in other words. And it's not just the U.S. that offers them. China is a big provider. The UAE itself recently extended a currency swap to its neighbor, Bahrain. The swap lines are there to give the recipient access to an alternative means of spending

if things happen to go awry in their economies. So how do they work? Well, imagine you have a niece who's about to go to college in the U.S. She's got some dollars for spending money, but actually most of her savings are in Bitcoin. Bitcoin. Yeah. Well, don't ask. Yeah, okay, well, that's tough because Bitcoin not necessarily easy to use on a college campus. You're not going to use that at the diner or probably not going to buy beer with it.

It's also really volatile. I guess if she ran out of money in her first quarter, she could try to sell some Bitcoin, but who knows what the rate could be by then. Or how easy it would be to trade it if Bitcoin. collapsed. Yeah, exactly. There's a lot of risk, but she can offset that risk by asking me for a currency swap line. So I'll give her the option to take five grand US of my money in exchange for a certain amount of her Bitcoin at any time during the first quarter. If the quarter ends and she's okay for cash, the option just expires, right? Yeah, but if she burns through money halfway through

the quarter, then she can exercise that option. So that would mean I deposit $5,000 into her bank account and return, I get 0.000-013 Bitcoin, or whatever rate we agree on. And that could be the rate on the day of exchange, or the rate on the day the line is offered. It depends. And that's the thing about currency swap lines. Everyone is bespoke, with different terms. That's right. And the all last different terms, too.

After a certain period, we're going to have to swap our currencies back, dollars for Bitcoin. And depending on the terms, she may have to pay interest on that 5K that I've effectively lent to her during that time. But the important thing for her is that she has access to that 5K if and when she needs it. The important thing for me is that I'm guaranteeing dollar liquidity, the ability to access dollars to one of my favorite nieces should the need arise. Are you saying the UAE is like one of America's favorite nieces? Well, maybe not nieces. But as Rachel Ziamba says, it is definitely a valued ally.

The UAE has been one of the biggest investors in the United States. They continue to pledge that they'll make good on their pledge to, invest, I think, $1.4 trillion. There's also projects, the UAE, members of the royal family, or even government actors have gotten involved with those close to members of the Trump administration. I'm thinking about digital assets, agreements, and the like. The UAE is a large buyer of U.S. weapons. And the UAE, of course, is one of the few countries in the Arab world that is signatory to the Abraham Accords that were negotiated in the first Trump administration. The Abraham Accords were a diplomatic, economic, and security treaties signed between Israel and several Arab nations.

So the UAE is a pal. And it's not what you'd call desperate for help, or at least not right now. It's exporting enough oil through its pipeline to keep its head above water. On paper, the UAE seems to be in great shape. The UAE is a country that has over $2 trillion in foreign currency assets, has $300 billion in central bank reserves. In other words, the UAE has a ton of dollars to hand, but a lot of them are owned by foreign investors and residents

who could withdraw at a moment's notice if they get wigged out by the way the war is going and decide to get out of the Gulf. Which is not beyond possibility. The Financial Times reported that 30,000 Brits alone have left the UAE since the beginning of the war. And more could follow. If they take their money with them,

it could put pressure on the UAE Central Bank and the Durham. Now, there's no clear evidence right now that the UAE is facing capital outflows of that magnitude, but nonetheless, as a sort of liquid market, this is something they're worried about. The UAE feels like it might just need a backstop. And that's part of the reason that it's asking for this currency swap line. But Rachel says there's another more subtle message buried in the request. It's not so much just about strength of policy. It's about alignment with the U.S.

So the UAE, even more than its neighbors, has gone out of its way to signal the U.S. is their preferred partner for AI development. The U.S. is the preferred partner for security. So the U.A. is sending this rhetorical message to the United States, and in a way the swap line would be part and parcel of that. But what about the U.S.? What's in it for America? Rachel says there are a number of reasons why the U.S. would want to help out this way. Helping the UAE could help America. Here in this context, the UAE would be selling dollar assets maybe to purchase other things,

maybe even purchase U.S. goods. So you could have a circumstance, which is that the dollar has stabilized and even strengthened a bit. Okay. Support for the dollar. Cool. Another reason? To keep pressure off our stock and bond markets. After all, the UAE is a big investor in the US. It holds treasuries. It holds American shares.

So some of the argumentation would be help us so that we don't have to sell those U.S. dollar assets, which might then put pressure on, say, U.S. treasury markets or U.S. equity markets. All of this is to say that a currency line is a pretty simple thing on the face of it. But like a swan gliding on the water, there's a lot going on under the surface. Hidden signals, subtle reminders. And of course, a healthy pinch of enlightened self-interest. An invisible hand, you could say. Adam Smith would be proud, Patty.

I do hope you would, Adrian. I do hope so. This episode was produced by Cooper Katz McKim and engineered by Robert Rodriguez. It was fact-checked by Sierra Juarez. Cake and Cannon is our editor and the indicators of production of NPR. Support for this podcast and the following message come from Humana.

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